Published on 12 Oct 2023.
RAM Ratings has lifted the Rating Watch on the BBB3(s) rating of Country Garden Real Estate Sdn Bhd (CGRE or the Company)’s Islamic Medium-Term Notes Programme (IMTN) and downgraded the issue rating to B3. The outlook on the rating remains negative. This rating action takes into consideration more recent developments surrounding China-based developer Country Garden Holdings Company Limited (Country Garden or the Group) – CGRE’s ultimate parent company and the corporate guarantor of the IMTN. These include reports of further missed interest payments on offshore bonds, warning on inability to meet offshore debt obligations, non-payment of HKD470 mil of indebtedness and the need to extend the maturity of its onshore bonds.
In our view, these actions indicate the extent of acute liquidity stress at Country Garden, and as such, the guarantor’s credit strength no longer provides any enhancement to the IMTN. Accordingly, we have equated CGRE’s IMTN rating to its own credit profile, which takes into consideration its very close relationship with its parent. The suffix (s) to the rating – which previously reflected the corporate guarantee from Country Garden and its subsidiaries – has as such been removed.
CGRE’s standalone credit strength reflects its short track record of financial self-sustenance. It historically relied on shareholders’ advances for the early development of several large projects. Nevertheless, we note that healthy take-up of property launches within Klang Valley and Johor Bahru in recent years and sale of inventory had enabled CGRE to service its obligations on its own since 2022. While its performance had improved in the last two years with pre-tax losses narrowing to RM11.48 mil in FY Dec 2022 (FY Dec 2020: pre-tax loss of RM1.18 bil), a lack of longer track record of cashflow generation stability and high inventory levels from past aggressive launches of high-rise properties in Johor remain key moderating factors to its rating. Excluding the substantial RM6.9 bil advances from shareholders (as at end-December 2022), CGRE’s operating profit before interest and tax debt coverage stood at a low 0.03 times in FY Dec 2022. These figures are unaudited as audited accounts have yet to be made available.
As of July 2023, it had three active, ongoing development projects at various stages of completion, with two registering a take-up of 75% or higher. The third project, targeted for completion in May 2025, was 71% taken up (by July 2023). We understand that CGRE completed one phase of its project in Johor Bahru on 17 September 2023 on a timely basis, despite recent events at its parent company. Advances from shareholders have also reduced to about RM6.9 bil as at end-December 2022 from the peak of RM12.24 bil as at end- December 2021. As of early August 2023, CGRE had about RM110 mil of unrestricted cash reserves (against the Company’s total cash of about RM500 mil). These numbers are based on CGRE’s representations as interim accounts for FY Dec 2023 are not yet available. While we understand that CGRE has been able to secure new project loans despite recent events, continued financial support from domestic lenders beyond CGRE’s ongoing and future projects will be necessary in light of its principal redemption due in March 2025.
CGRE’s ambitious Forest City development will take at least 30 years to complete. Over the longer run, the Malaysian government’s recent designation of Forest City as a special financial zone may reignite interest in and demand for properties within the development, but as this development is still nascent, we have not factored it into our credit assessment. The special zone will offer incentives like multiple entry visas, fast-track entrance for individuals working in Singapore and a 15% income tax rate for knowledge workers. We understand that Forest City has been working out the tax and visa incentive packages with the Federal and State Governments following the Prime Minister’s announcement and we will monitor further developments on this front.
The negative outlook reflects the uncertainties surrounding the possible action by Country Garden’s creditors/bondholders in relation to its missed principal repayment/upcoming repayments as well as Country Garden’s actions before the end of the remedy period for its missed debt payments, and the implications for CGRE. Of note, the shareholders’ advances – while it does not have any repayment terms or finance costs – is not legally subordinated to the sukuk, although the repayment of these is subject to certain conditions. Under the terms of CGRE’s sukuk, a default at Country Garden can trigger a cross-default on CGRE’s sukuk. Country Garden still faces sizeable maturities for the rest of the year, although it has extended these for all nine of its onshore bonds by three years within one month. The Group has to resolve a reported missed coupon payment on dollar bonds that fell due on 17 September 2023 within the specified grace period and has recently missed payment on a HKD-loan and warned about inability to meet all offshore debt obligations when they fall due or within the relevant grace periods. Over the longer-term, its prospects will hinge on its ability to generate sales and the effectiveness of the Chinese government’s property easing measures to address the country’s housing crisis.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
(603) 3385 2500
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2023 by RAM Rating Services Berhad
Ratings on Country Garden Real Estate Sdn Bhd